Ten years of tightening management over London’s funding has stunted our development

Ten years of tightening control over London’s funding has stunted our growth

Friday, March 17, 2023 5:32 am


Paul Honigben

Paul Honeyben is Strategy Director: Local Government Finance & Improvement for London Councils

Since Boris Johnson became Mayor of London, the capital has less control over funding. (Photo by Andrew Matthews – WPA Pool/Getty Images)

For years we’ve been promised more decentralization, but none of this has resulted in more control over how we spend money in London and it’s constraining our growth, writes Paul Honeyben

Much has changed since 2013, when then-Mayor of London Boris Johnson hired LSE professor Tony Travers to head the London Finance Commission (LFC) to investigate funding arrangements in the capital. Nobody had heard of Brexit or Covid-19. Few people knew what net zero meant, and austerity measures were just beginning to take effect.

The backdrop was the capital’s seemingly unstoppable growth, driven by the agglomeration of financial and professional services in central London, with a population projected to increase to 9 million by 2020 and 10 million by 2030.

The commission found that only 7 percent of tax revenue was withheld in the capital, compared to over 50 percent in New York and other world cities. This showed that London was a big outlier. It concluded that the London government – made up of the 32 boroughs, the City of London Corporation and the Greater London Authority – should be given more freedom to direct and use the resources collected from taxpayers, particularly the full range of Property taxes, including council taxes, business taxes, and stamp duty.

This would improve local accountability, raising the number to — still a modest — 12 percent. It would also require the mayor and borough heads to create a more formal mechanism for handling transfers of tax or spending powers, in which both levels of government would be represented.

Ten years later, progress has been limited.

The highlight was the nationwide business rate pilots in 2018-19 and 2019-20, which tested the additional maintenance of business rate growth by London Boroughs and the GLA and tested their ability to make joint investment decisions on part of the to generate additional revenue. It raised over £600m in additional funding and leveraged the governance principles envisaged by the London Finance Commission.

Unfortunately, local government funding has become even more centralized over the past decade, and the government and Treasury show little appetite for reform. Council taxes now account for three-fifths of council funding – up from two-fifths in 2013. It makes less and less sense to put so much of the funding burden on a regressive tax that hasn’t been reassessed for 30 years.

The central government still sets the national corporate tax multiplier and nearly all corporate tax breaks, meaning councils have very little ability to support local businesses through the tax. Local governments are stuck in a complex system of partially maintaining business rates, miles from the true decentralization proposed by the LFC.

Most grants are earmarked and cannot easily be combined to be spent on local priorities, preventing common, place-based approaches to service delivery.

Many of the challenges the capital faced in 2013 – affordability of housing, air and noise pollution, traffic jams, youth violence – remain. But London’s context is changing.

The 2021 census shows that London’s population growth is now slowing and will only reach 8.8 million by 2021 and is not expected to reach 10 million before 2040. The agglomeration model seems to be changing to a more polycentric model with greater economic and social diversity in the districts and subregions.

The pandemic has exposed the growing inequalities in the city, but also highlighted the limited effectiveness of top-down solutions and the need for local leadership. The successful delivery of services and support to communities and businesses provides a strong evidence base to support arguments for greater decentralization. London Boroughs showed what could be achieved if given sufficient resources and responsibility for their communities.

While London and the UK have changed significantly since 2013, the logic of increasing decentralization in the management of tax and funding by corporations still applies today. Perhaps we need change even more than we did ten years ago.

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